September 11, 2006

A year ago, Pune-based Manish Sahni was scouting for opportunities toinvest in real estate. After weighing various options, he bought 60,000 sq ft in Nucleus Mall by Vascon Builders, at Rs 4,500 per sq ft. At Rs 40 per sq ft per month, a big retail chain pays him an annual rent of Rs 2.88 crore. His annual return on investment: 10.7 per cent. Since his ground floor space has been leased for 10 years, Sahni feels he has made an investment that will earn him steady long-term returns. Sahni’s scale may be out of reach for most investors, but his returns aren’t. Its sure short real estate india boom and the winner is the one who make the right decissionAccording to DTZ Debenham Tie Leung, a real estate consultancy, the number of malls is set to rise from the current 50 to 500 by 2010. An estimated 50 million sq ft of organised retail space will be added over the next five years. This will largely be led by young and affluent consumers across the country preferring to shop in an organised retail environment. For high net worth investors, therefore, malls present an attractive investment opportunity. But with rates ranging from Rs 5,000-30,000 per sq ft in different cities, your net worth needs to be really high, though smaller spaces are available too. Income, appreciation, or both?Before investing, ask yourself whether you are looking for capital appreciation or regular rental returns. According to Suryavir Singh, Assistant Chief Manager, Sahara Infrastructure and Housing, “If you are looking for quick capital appreciation, invest in land in upcoming suburbs and townships. But if you are looking for regular, long-term rental returns, malls are a good option.” Sahara developed one of the first malls in Gurgaon and has recently launched another in Lucknow. According to a report by real estate consultancy Jones Lang Lasalle, rental yield from malls is in the range of 10-12 per cent across the country. This is comparable to the return from office space (9.5-11 per cent), but is much higher than the rental return from residential space 4.75-6 per cent. In addition to the returns, another advantage of an investment in malls is that the lease agreements are long-term ranging from three to nine years. If you buy space in a high-quality development and manage to lease it to a good brand, you have locked in your returns. Usually, lease agreements also stipulate a 15 per cent escalation in rental every three years, which improves your yield on money invested. However, not every mall will be a winner. In many, shops will remain vacant, footfalls will be low, and sales abysmal. As an investor, you need to do your homework so that the mall you invest in is a winner. Which mall?Whether a mall will do well is closely linked to the population of its catchment area (the area from which it expects its customers), per capita income, how this income will grow in the coming years, and what percentage of this income will be spent on retail and entertainment. These factors determine how much retail space, and hence how many malls, the area can support.
Make sure the mall you invest in is situated in a market where retail expenditure exceeds the amount of retail space developed so far. Usually, early movers do well. They corner the best brands, and hence attract the most customers and sales. Avoid saturated markets, say, where there are 10-12 malls within a 4 km radius. Sometimes, a clustering of two or three malls at one place can be an advantage. The whole area begins to be perceived as a ‘shopping destination’ and attracts higher customer traffic. But if the number of malls rises beyond a critical point, the same brands open stores in neighbourhood malls. (That’s because the number of retail brands is limited.) In that case, one mall merely cannibalises the sales of another.
Take New Delhi’s Saket. Here, there are three malls being built, one each from DLF, Select and MGF. Says Pranay Sinha, CEO, Select Infrastructure which is developing Select Citywalk: “Most malls have so far been developed in the suburbs, but not in south Delhi or south Mumbai, where purchasing power is among the highest in the country.” The first few players who begin operations in south Delhi are likely to do well. Similarly, Sahara group’s mall in Lucknow, Sahara Ganj, which began operations in November 2005, has done well because it is the first large mall in the city. It also enjoys the advantage of being situated in East Hazratganj, Lucknow’s prime commercial area. According to Singh of Sahara, with markets in grade A cities and their suburbs getting saturated, grade B and C towns might offer good options to mall investors. Who’s your customer?Even if you get the location right, whether buyers throng your mall will depend on another crucial factor its retail mix or the selection of brands in that mall. As Sinha of Select says, “This determines who walks into your mall.” The mall developer must be clear about who are his target customers, what those customers buy, and then get those brands into the mall. Says Aditya Sikri, CEO of Spiceworld, a Noida-based mall: “The process must be very research driven.” Before deciding on its retail mix, Select Citywalk surveyed the women of south Delhi to find out where they shop. One of the retailers whose names appeared frequently was L’Affaire, a saree shop in GK, to which even NRIs flock during their visits to India.So Select invited L’Affaire to set up a shop in their mall. A common mistake investors make is to buy the property or space at the mere announcement of a project. When space is sold, the mall loses control over its retail mix, which hurts the investment post handing over. Says Manoj Motta, GM of Mumbai-based Inorbit Mall, Malad (W): “Selling off space creates a fixed brand mix, which in turn creates monotony and staleness.”Is the builder interested?Another factor that determines whether a mall will succeed or not is the revenue model that the developer follows. Says Pankaj Dayal, CEO, NAI Collaborators, “Find out if the builder wants to sell space and exit the day the mall becomes operational. Or will he take responsibility for running the mall?” Adds Sujit Kumar, CEO, Aeren RJ Group which is developing a 2 million sq ft mall, one of the largest in the country, at Ludhiana: “Fragmented ownership can sound the death knell of a mall.”
There are two reasons for this. One, once space is sold the developer cannot control who sets shop in the mall. Two, if the developer makes an early exit, there is no central entity that will take responsibility for maintenance and promotion of the mall. Together, these factors play a big part in ensuring the success of the mall.
Some malls like Aerens’ Festival City Mall in Ludhiana are only leasing space and have entered into a revenue-sharing arrangement with retailers. However, since developers need early returns on their investments, sale of space does happen. A number of models have emerged by which developers try to get capital without fragmenting the ownership too much. Says S.P. Nair, vice president of Pune-based Vascon Builders: “We struck a joint venture with the landowner so that he became part investor in our project.”
Mumbai-based Satra Properties, which will open its first mall at Vile Parle near Diwali and whose three other malls will be operational by end-2007 has opted for a mixed 50:50 lease and sale model. Says Praful Satra, CMD: “Outright sale allows us to recover our investments to some extent, while leasing allows us to change the brand-mix as and when we desire.” Some developers, after leasing out the mall fully and making it operational, exit by selling to a single investor. Once real estate mutual funds (REMFs) become operational, they will buy up entire malls, offering developers another exit option. As an investor, appreciate the importance of centralised control, and enter into malls where ownership is not highly fragmented. What’s his track record?Before investing in a mall, visit the developer’s earlier projects to see how much acumen he has at developing malls. As Motta of Inorbit says, “Verify the credentials of the mall developer and that of the management.” Make enquiries about the developer’s record for timely deliveries, and whether the final product meets promised standards.
In addition, make sure the builder has complete and unencumbered title to the land on which the mall is being developed. Says Singh of Sahara Infrastructure and Housing: “The developer should have transferred the land to his own name before he begins sale of space.”
When should you buy?
Should you invest early, when the developer has just announced his mall, and very little is known about it? The only basis you have then for making the investment is the builder’s track record and your knowledge of the location. The retail mix is not clear, so your investment risk is greater. But at early stages, prices tend to be lower, so the return on investment, if the mall does well, would be high.
On the other hand, if you delay your purchase and enter closer to the day of launch (by when most the space would be leased out), then you are making a more secure investment. But since your purchase price will be higher, your returns are likely to be lower. Your risk appetite should determine at which stage you choose to make the investment.
Also, stay out of markets where speculation has driven prices too high. Remember, the more you pay for the asset, the longer it will take you to recoup your investment (through rentals).
How risky is it?Finally, investing in a mall is not a sure-fire recipe for high and assured returns. For your investment to do well, enough customers must travel to the mall, and walk-ins must translate into sales. On this count, the decline in many malls has already begun, where retailers, after a year or two, have shut shop and moved out. And investors are left holding empty spaces. -----------------------------------------------------------------Source://http://www.expressestates.in/full_story.php?content_id=73582